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Investors should load up defensive sectors like consumer staples as macro data sends mixed signals about the economy, Morgan Stanley says

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  • The latest macro data is sending mixed signals, reflecting both a “no landing” and a “soft landing,” Morgan Stanley said. 
  • The bank recommends defensive sectors, including consumer staples, to navigate volatility. 
  • Analysts said the April CPI data on May 15 will be key in shaping the Fed and the market’s next move. 

Investors should ramp up investments in defensive stock sectors like consumer staples and utilities as the latest data sends mixed signals about the economy, Morgan Stanley says.

Analysts led by Morgan Stanley CIO Michael Wilson said in a note that recent macroeconomic data has hinted at both a soft landing and a no landing scenario, and all eyes are now on the coming inflation report on May 15. 

“The April CPI on May 15th is the next key macro event in terms of informing the path of monetary policy and the market’s pricing of that path,” the analysts wrote.

“As usual, the price reaction on the back of this release may be more important than the data itself given how influential price action has been on investor sentiment amid an uncertain macro set up.”

Wilson highlighted stronger-than-expected data from the Employment Cost Index and prices subcomponents of ISM manufacturing and services indexes, while nonfarm payrolls, The Conference Board consumer confidence index, and headline ISM readings fell short of expectations.

Based on this rationale, Wilson suggests opting for robust cyclical names in a no-landing scenario and premium growth stocks in a soft landing.

“One might even want to consider adding a bit of exposure to defensive sectors like utilities and staples, in the event that gauges of business activity slow further,” Wilson added. 

Zooming in, Wilson’s team found that many companies are increasingly focused on providing “value” to customers as they prepare for a spending pullback among consumers. 

“We prefer Staples over Discretionary in this context and in today’s later cycle environment. It also provides some more defensiveness to portfolios as a hedge amid uncertain/unpredictable macro data,” they said. 

Last week’s Federal Reserve meeting also sent conflicting signals, according to the analysts. Chairman Jerome Powell showed less certainty about the timing of the initial rate cut due to recent inflation data but firmly dismissed the idea of the next move being a hike. 

Read the original article on Business Insider